Euro Weakens Ahead of ECB Meeting
What’s been happening?
Pound Sterling – UK Markets
The British pound took advantage of the upbeat PMI data on Wednesday and posted modest gains against both the dollar and the euro.
The IHS Markit’s Service PMI in May improved slightly to 51 from 50.4 in April and came in better than the market expectation of 50.6. Commenting on the data, “Although service sector business activity gained a little momentum in May, with growth reaching a three-month high, the pace of expansion remained disappointingly muted and failed to offset a marked deterioration in manufacturing performance and a fall in output of the construction industry during the month,” Chris Williamson, Chief Business Economist at the IHS Markit, said.
Meanwhile, in a scheduled speech on Wednesday, Bank of England Deputy Governor Dave Ramsden reiterated that there was still a lot of uncertainty around Brexit and didn’t deliver any specific comments on the monetary policy outlook.
US Dollar – US Markets
The greenback came under a renewed selling pressure in the early trading hours of the American session after the monthly jobs report published by the ADP showed that the private sector employment increased by 27,000 in May to miss the market expectation of 180,000 by a wide margin. Assessing the data, “Following an overly strong April, May marked the smallest gain since the expansion began. Large companies continue to remain strong as they are better equipped to compete for labour in a tight labour market,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute.
In the second half of the day, however, the Institue for Supply Management’s (ISM) Non-Manufacturing PMI improved to 56.9 in May from 55.5 in April and surpassed analysts’ estimate of 55.5 and helped the currency recover its daily losses. Moreover, the IHS Markit’s Services PMI came in at 50.9 to fall in line with experts’ forecasts.
Regarding the Fed’s policy outlook, Governor Lael Brainard echoed Chairman Powell’s comments and said that the Fed was prepared to adjust its policy to sustain the expansion. “Economy is in the midst of a very lengthy expansion, with confident consumers, but trade conflict is a downside risk,” Brainard explained.
Euro – European Markets
The business activity in the service sector of the eurozone and the euro area expanded at a more robust pace than expected in May with the IHS Markit’s Services PMI figures coming above the market expectation. Other data showed that retail sales in the euro area contracted by 0.4% on a monthly basis in April and the Producer Price Index declined 0.3% in the same period to fall short of analysts’ estimate for an increase of 0.3%.
Despite the upbeat PMI data, however, concerns over Italy’s finances hurt the shared currency and caused it to post losses against the pound sterling and the dollar. In an official statement, the European Commission on Wednesday said that Italy’s growing debt justified the launch of a disciplinary procedure against Rome. "Italy is backtracking from structural overhauls and the pension reform," the Commission further noted.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK on Thursday but Bank of England Governor Carney will be delivering a speech.
US: Weekly jobless claims, trade balance, nonfarm productivity, and Challenger job cuts data will be featured in the U.S. economic docket on.
EU: The Eurostat will release the first-quarter GDP and employment change data before the European Central Bank announces its interest rate decision and publishes the monetary policy statement. Although experts don’t expect the ECB to announce any changes to its policy, President Draghi’s speech will be watched closely by investors especially after yesterday’s soft inflation data.